What now? The UK and the EU Single Market

I'm City A.M.'s economics reporter, looking at the news, stories and data that move markets in the UK, Europe and around the globe. I also cover broader developments in the business and political worlds at home and abroad.

Economists, the City, and businesses are almost of one mind on what would be best for the UK (Source: Getty)

Jake Cordell

Now the UK has voted to leave the European Union, the focus on what kind of relationship we should forge with the trading bloc has taken on a new intensity.

We are no longer talking hypothetically and the debate over whether we should have “access to” or be “in” the Single Market is more than semantic.

The single market: In theory

The “Single Market” is the term used to describe the combined EU economy, made up of 28 countries, 500m people and more than 20m businesses, designed to enable borderless travel and trade.

A true internal market would mean people, goods, services, and capital – the so-called “four freedoms” – can move around the bloc as if it were a single jurisdiction with full access, under the same rules and no tariffs.

For the City, the Single Market comes with “passporting” rights which allow financial services firms headquartered in London to do business across every one of the other 28 EU members.

The single market: In practice

However, the EU has had mixed success in creating its vision of the Single Market.

“It’s worth remembering that of the four freedoms, movement of services and capital are far from free,” Raoul Ruparel, co-director of Open Europe told City A.M.

Brussels think tank Bruegel, added: “It is safe to conclude the impact of the Single Market has somewhat fallen short of initial expectations.”

Consider how long it has taken to reach an agreement to abolish roaming charges, for instance, something that won’t be fully completed until June 2017. The other layers of the European project, most notably the currency lead Eurozone, have also created obstacles to a fully-fledged Single Market, by establishing different tiers of EU membership.

The negotiations: Three versus one

The UK is broadly content with three of the four freedoms offered by joining the European Economic Area (EEA), Open Europe’s Ruparel said. The ideal solution, from the government’s perspective, would be to join the EEA, be outside the EU and control the movement of people into the UK.

Europe is unlikely to make it that easy. Leaders have made it clear they are not going to let the UK cherry-pick what bits of the Single Market it wants to keep.

From where they stand, the four freedoms are a package deal. Jacques Pelkmans, a senior fellow at the Centre for European Policy Studies told City A.M. he expects the other 27 countries to stick with the hard line throughout the negotiations.

Do we want access?

Business groups and City firms want to strike a comprehensive deal to maintain access to the single market and the vital passporting rights which let financiers do business across the EU.

The idea of jumping into the EEA with minimal disruption has also struck a tone with the “liberal Brexit” camp, such as the Adam Smith Institute which said it is the safest and most prosperous route out of the EU. Trade unions back the EEA route as the best to protect jobs.

Economic forecasts produced before the vote also tended to show EEA membership – and full single market access – was the best option for the UK economy if it left the EU in terms of growth.

However, the Economists for Brexit group branded the single market inappropriate for the UK, since it imposes a “one-size-fits-all regulatory regime” and dismissed the idea of a customs union as an economic “evil”.

Patrick Minford, one of those economists, said the UK would be better off trading under basic World Trade Organisation (WTO) rules and unilaterally abolishing tariffs on imports.

This, he believed, would reduce prices at home as the UK could buy from around the world cheaper and could spur other countries to reciprocate.

Full access to the Single Market, through the EEA or some kind of EEA-lite option could also hinder one of the other main arguments in favour of leaving the EU – the ability for the UK to strike its own trade deals.

Tamara Hervey, a professor from the University of Sheffield told City A.M.: “Unless we opt for a future relationship with the EU that is outside all the European frameworks for trade and cooperation, then even if we leave the EU, our ability to strike trade deals with other countries outside it will be affected.”

In short

Economists, the City, and businesses believe staying as close as possible to the Single Market is the least disruptive way to quit the EU. But getting that access could be impossible on terms that satisfy those who voted to leave in the first place, and might hinder the ability of the UK to take full advantage of its ability to trade with the rest of the world.